Observations by an academic researcher on the use of “open”-ness as a competitive strategy, with a particular interest in coping with the commoditization of information goods and technologies in an Internet-enabled world.

Friday, November 2, 2012

I've been meaning to blog about the great cover on a recent Bloomberg Business Week. (Perhaps thanks to its spendthrift mayor, the magazine is now economically illiterate, but it still has good artwork.)

The cover story was about the travails of the quintessential “big box” retailer, Best Buy. (I’d hoped to post for Halloween but October was a hectic month).

Interestingly, in trying to find the cover story (with the magazine’s useless search engine), I found a 2007 story promoting the stock at a target price of $63. (It’s now at $15). I think this illustrates the point that the displacement of storefront retail by online (particularly Amazon) has been quicker and more severe than almost anyone anticipated.

The October story notes that the company has failed in its online strategy due to an excess of caution:

Best Buy’s response to Amazon and other online threats has been inadequate. The company set up bestbuy.com as early as 2000, when Schulze was still CEO as well as chairman, but years later, as purchases of TVs, stereos, and microwave ovens shifted increasingly to the Web, the site still lacked such basic features as customer reviews. An Internet unit didn’t get much financial support and was kept walled off from store sales. While e-commerce now accounts for more than 20 percent of U.S. consumer-electronics sales, online is only 6 percent of Best Buy’s domestic revenue.

Cannibalism is a concern of most storefront retailers, but one that can be overcome. Of the top 10 US e-commerce sites listed in the story (bestbuy.com was #11), 5 are by companies with a storefront presence: Staples, Apple, Walmart, Office Depot and Sears. Clearly Apple is agnostic to whether it sells its products online or in stores, but Staples has been a great success in making the transition also.

(There is also a certain irony of reading about the death of physical retailers in a physical magazine, given what’s been happening to them recently. The Bloomberg Business Week website seems to violate all the precepts of best-in-class customer-friendly experience, as prescribed for Best Buy.)

So what is the answer? Founder Richard Schulze (now trying to buy back the company) wants to double-down on the in-store experience, a viewpoint supported in an August 6 BBW article about his takeover attempt:

According to Alex Goldfayn, chief executive officer of the marketing strategy consultancy Evangelist Marketing Institute and author of the book Evangelist Marketing, Best Buy needs to focus on improving its in-store shopping experience, rather than competing online. “They need to understand that if they make their business about competing with Amazon, they’re going to lose,” he says. “In fact, they’ve already lost, and they’ve lost painfully and publicly in a very sad and ugly way. Their one advantage in the world is their physical stores.”

Goldfayn, who outlined his Best Buy improvement plan for Mashable in February, suggests a quick and dramatic overhaul. “Rather than thousands of boxes on shelves, which are ugly and don’t do anybody any favors, they need to set up tables for people to interact with the technology,” he says. “There isn’t really a [store] that you can go to now to literally interact with technologies from multiple manufacturers, and Best Buy is in the unique position to let people walk into a store and experience not only the iPad but also the Samsung Galaxy and also another Android tablet.”

Both Goldfayn and Schulze seem to believe that first-rate service would create traffic and loyalty. (It also seems like it would further accelerate showrooming).

The same article also quotes a Morningstar analyst who says customers are driven by price, and the chances of turning around Best Buy are “a long shot.”

Whether Best Buy survives — as a big store, tiny store, discount warehouse or high-service emporium — begs the broader issue of whither storefront retail? The implications go far beyond one company: Books and CDs are gone, electronics is going (cf. Circuit City), and clothes seem to be slowly heading in that direction. Movie theaters are also disappearing in the face of Netflix and (again) Amazon downloads.

Meanwhile, what is the future of commercial real estate in such a scenario? Do strip malls just become restaurants, liquor stores and grocery stores? Does the suburban shopping mall die before it turns 100?